Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of PCBL Limited (PCBL).

Revenue grew 30% in fiscal 2023 against the previous fiscal, driven solely by increase in realisation. Earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne remained healthy and rose to over Rs 16,400 per tonne in fiscal 2023 from Rs 14,300 per tonne in fiscal 2022. The EBITDA per tonne is expected to remain at Rs 16,000-17,000 over the medium term.

 

Furthermore, expected capacity addition of 1,47,000 tonne per annum (TPA) through the greenfield project being undertaken in a wholly owned subsidiary in Tamil Nadu and capacity addition in the Mundra plant for speciality black, should increase the overall carbon black (CB) capacity to 770,000 TPA by the end of the current fiscal and boost revenue growth. Any change in the demand-supply dynamics in the industry affecting profitability will remain a key rating sensitivity factor.

 

The financial risk profile remains strong, as reflected in comfortable leverage with gross debt to EBITDA ratio of 1.3 times as on March 31, 2023, and healthy debt protection metrics as indicated by interest coverage ratio of above 14 times during fiscal 2023.

 

The rating continues to factor in the market leadership of PCBL in the domestic CB industry along with an increasing global footprint, healthy operating efficiency and strong financial risk profile. These strengths are partially offset by susceptibility of operating profitability to fluctuations in crude oil prices and foreign exchange (forex) rates, and exposure to competition from imports and risks related to cyclicality in the automobile industry. However, the forex risk is reduced as the company hedges most of its net forex exposure at all points of time. Furthermore, a significant portion of the sales is from the tyre segment which operates as per pricing formulae, thereby reducing volatility, if the volumes are maintained.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of PCBL and all its subsidiaries to the extent of its shareholding as they have significant business and financial linkages and common management.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Market leadership position in the domestic CB industry and increasing global footprint

PCBL is the largest player in the domestic CB market, with market share of about 41% in terms of capacity and the seventh largest manufacturer of CB globally. The company has production capacity of 666,000 TPA after commissioning of the first phase of its greenfield project and plans to augment it by 104,000 TPA by end of fiscal 2024. It is the largest exporter of CB in India, operating in more than 50 countries. Exports contributed 30% of the revenue in fiscal 2023, up from around 20% in fiscal 2017, due to expansion of its customer base across geographies.

 

PCBL manufactures over 85 grades of rubber CB and specialty black. Its focus remains on high-performance and high-margin products under both CB and specialty black. It has strategically aligned its product portfolio with the business needs of customers and works jointly with them for developing products and providing technical services. PCBL mainly caters to large tyre manufacturers and has established relationships with them. The company drew almost 62% of its revenue from the tyre segment in fiscal 2022. Large scale of operations, coupled with timely and high-quality service, supports the company in maintaining healthy relationships with key customers.

 

Healthy demand outlook for end-user segments, majorly the domestic tyre industry, will drive revenue growth over the medium term. This growth will also be supported by enhanced specialty black capacity commissioned in fiscal 2021 and additional capacity of 40,000 TPA to be commissioned in two phases, that is 20,000 TPA by June 30, 2023 and balance by end of June 30, 2024, which will solidify the company’s market position.

 

Healthy and improving operating efficiency

PCBL benefits from the strategic location of its manufacturing facilities. Its four facilities are near ports and have easy access to raw materials, lowering logistical costs. PCBL imports 70-80% of its raw material and exports 30-35% of its products. The company also has power plants at all its facilities, which use tail gas generated in the thermal decomposition process for making CB. The company sells 50-60% of the power generated.

 

Although the EBITDA margin has fluctuated between 13% and 19% in the past five years, EBITDA per tonne has been healthy and on an increasing trend to Rs 16,400 per tonne in fiscal 2023 from Rs 11,000 per tonne in fiscal 2020.

 

The company is in the process of adding additional speciality CB capacities to be commissioned in fiscals 2024 and 2025. Speciality CB is a value-added product and gives a higher profit margin than regular CB products. The share of specialty black in sales volume rose to around 9.0% in fiscal 2023 from 1.4% in fiscal 2016 and is expected to gradually increase in the coming fiscals. This increase should boost the operating margin. Considering the recovery in demand and calibrated capacity additions by the industry, the current spreads will sustain over the medium term and aid operating profitability.

 

Strong and improving financial risk profile

The financial risk profile has strengthened over time, supported largely by healthy cash generation. Consequently, gearing and debt to EBITDA ratio improved to 0.30 time and 1.3 times, respectively, as on March 31, 2023, from 0.67 time and 2.33 time, respectively, as on March 31, 2017. Debt protection metrics were healthy, with interest coverage and net cash accrual to adjusted debt ratios of 14.5 times and 0.4 time, respectively, for fiscal 2023. The ratios are expected to be comfortable over the medium term as well.

 

PCBL has undertaken capital expenditure (capex) of Rs 950 crore for greenfield CB expansion in Tamil Nadu, adding capacity of 147,000 TPA, out of which 63,000 TPA has been commissioned and the remaining will be commissioned in the next three months. Also, it will undertake investment of Rs 320 crore for brownfield expansion in Mundra, Gujarat, adding specialty CB capacity of 40,000 TPA. The company is expected to undertake capex of Rs 350-450 crore per year over the medium term, depending on the demand scenario. The capex will be partly funded through debt. Healthy cash generation will ensure debt protection metrics remain comfortable with gearing expected to be below 0.5 time and debt to EBITDA ratio at around 1.5 times.

 

Weaknesses:

Susceptibility to volatility in crude oil prices and forex rates

CB feedstock (CBFS), derived from crude oil, is a major raw material for CB production. Any increase in crude oil prices may drive up CBFS prices, and thus increase the operating cost of players. Thus, the operating margin remained at 3.2-19.7% for the past 10 years. However, the company has a pricing formula linked to crude oil prices for the tyres segment, which accounts for a significant proportion of sales, thereby mitigating any risk to profitability. The company imports 70-80% of raw material and is vulnerable to volatility in forex rates. This is largely mitigated by a natural hedge because of exports and a stringent hedging policy. Since fiscal 2016, the increasing share of specialty black in sales and improving yields and input-output ratio have helped reduce volatility in operating profitability.

 

Exposure to risks related to removal of anti-dumping duty on CB

The Government of India on November 18, 2015, imposed an anti-dumping duty on CB originating in or exported from China and Russia. The duty lapsed on January 5, 2021 and was not extended. However, this did not result in large scale dumping of CB by Chinese producers in India, as demand remained healthy. Moreover, cost of production increased sharply for Chinese players. The changing cost structure for Chinese players constrained supply in that country due to plant shutdowns, and the threat from China is likely to remain limited in the near term. Furthermore, the basic customs duty on CB imports increased to 7.5%, which will keep its imports into India in check. Nevertheless, any effect on the business of PCBL, if Chinese imports turn cheaper, will be closely monitored.

 

High susceptibility to cyclicality in the automobile industry

Demand for domestic CB depends on growth of the tyre industry, as ~65% of overall CB produced in India is consumed by tyre manufacturers. PCBL generated around 60% of its revenue from the tyre industry in fiscal 2023. Hence, CB revenue can be impacted by sluggish demand from tyre manufacturers, owing to slowdown in demand from automobile original equipment manufacturers (OEMs), or shutdown of tyre dealerships or automobile service stations, as seen during the Covid-19 pandemic, which affected aftermarket sales for tyres. That said, 70% of the tyre demand is from the aftermarket, which is generally more resilient than OEM demand. With revival in automotive demand and opening of markets for aftermarket sales, CB demand has grown in fiscals 2022 and 2023 after subsequent decline in fiscals 2020 and 2021.

Liquidity: Strong

PCBL will likely maintain healthy liquidity with annual cash accrual of Rs 350-450 crore over the medium term against debt obligation of Rs 100-130 crore. The fund-based bank limit of Rs 750 crore was utilised at 43% on average over the 11 months through March 2023. Cash and equivalent were Rs 96 crore as on March 31, 2023. Capex planned for the medium term will be funded by internal accrual and partially through debt. Cash accrual and bank lines will be sufficient to meet incremental working capital requirement.

Rating Sensitivity factors

Downward factors

• Operating performance weakens considerably due to intense competition and sluggish demand impacting operating profitability and cash accrual to below Rs 250 crore
• Debt protection metrics weaken (debt to EBITDA ratio of 2-2.25 times), most likely because of higher-than-expected debt-funded capex or acquisitions, weak cash generation or stretch in the working capital cycle

About the Company

Incorporated in 1960, PCBL manufactures CB. It has four plants―one each in Durgapur, West Bengal; Mundra and Palej, Gujarat; and Kochi, Kerala; with aggregate capacity of 666,000 TPA. The company also operates 98-megawatt cogeneration power plants based on gas generated in the CB manufacturing process. PCBL is a part of the Kolkata-based RP-Sanjiv Goenka group.

Key Financial Indicators

As on / for the period ended March 31		2023*	2022
Operating income	Rs crore	5,774	4,451
Profit after tax (PAT)	Rs crore	442	427
PAT margin	%	7.70%	9.6
Adjusted debt/adjusted networth	Times	0.3	0.3
Adjusted interest coverage	Times	14.5	17.3

*Provisional

Any other information: Not applicable